The IRS is increasingly focused on revealing and addressing non-compliance among certain foreign investors’ lending income. In June of 2021, the IRS’s Large Business and International Division launched a campaign (LB&I Campaign) to address “whether foreign investors were subject to U.S. tax on effectively connected income from lending transactions engaged in through a U.S. trade or business.”¹ And it is widely reported that IRS officials have already stated that the first set of investors’ returns will be forwarded for audit this fall.²
Generally, Internal Revenue Code §864(b)(2)’s safe harbor provides that foreign investors trading stocks and securities for their own account are not engaged in a U.S. trade or business. But the LB&I Campaign will target “financial service entities” like foreign dealers in stocks or securities, entities engaged in a lending business, and foreign investors in partnerships engaged in such activities. Thus, the LB&I Campaign is beginning issue-based examinations for those outside of the IRC §864(b)(2) safe harbor.
According to Bloomberg, at a recent International Fiscal Association webinar, Cindy Kim (program manager for the IRS’s Cross Border Activities Practice Network) emphasized that “[w]e recognize audit coverage in this space has been very rare in the past and this has been a gap in our compliance plan.”³
Taxpayers should be mindful of this campaign and work with advisers experienced with examination procedures currently in place by LB&I. Contact us at 410-497-5947 or schedule a consultation with our brief contact form.